Saturday, May 28, 2005

Where would you like the deck chairs today, sir?

"Let’s just say we were old friends, and you have money and I am broke. I need to borrow from you to just pay my expenses. That’s fine with you so you are lending me money. In the meantime, I’m taking that money and I’m just spending lavishly. I’ve bought a mansion on the beach and I’m having parties every night, traveling first class, buying designer clothes, and just spending like mad...But as time goes on, let’s say a few years later, for every $10,000 your lending me, I’m paying back only $7,000. After a while, you’re going to say, ‘Look, this isn’t working out too well.’

"Unfortunately, this is the situation that the US is in today. We’re definitely not gloom-and-doomers by any means. But if we just look at the facts of what is happening, you have to ask how this is happening. It actually started in the late 1990s. As you know, the stock market bubble burst. The NASDAQ then plunged 78%, at which point deflation forces intensified. To avoid deflation, interest rates were dropped hard and fast to 45-year lows. Monetary stimulation exploded, and to make matters worse, 9-11 added fuel to the fire. As the war on terrorism kicked in, the US budget surplus quickly went from a surplus to the biggest debt and deficits that the world has ever known.

"The end result was the biggest credit explosion in US history. Meanwhile, deficit spending and monetary stimulation also resulted in inflation. And even though inflation is still relatively low, it is the highest it has been in 14 years. This is all very similar to what happened in the 1970s. Like now, money was loose, deficits were huge, inflation soared, and budget deficits were large. ...

"Yes, dollar reserves are still huge. But what’s important to note is that the US is using up 80% of the world’s available savings, and it is borrowing $2 billion a day from overseas to cover its debt. Now this means we are very dependent on foreign money. These huge imbalances simply cannot continue. Economists continually debate this situation and no one knows what will happen. Paul Volcker, for example, recently said, ‘Circumstances seem to be as dangerous as any I can remember--and I can remember a lot. What really concerns me is that there seems to be so little willingness to do anything about it.’

No comments: